Severstal to set up giant $5 bn steel plant in Karnataka

Dec 16, 2010

Natalya Fedótova

RIR

Source: RIA Novosti

Severstal, a major Russian steel producer, plans to launch a large-scale steel production project in India. In December, the company signed a memorandum of understanding with Indian state-run NMDC. The steel mill will become Severstal’s biggest project in the near term, and the biggest international venture for the Russian steel industry in general.

Although the exact share of Severstal's interest is not known, an NMDC top manager said in a public statement that the two companies would either negotiate equal holdings or a controlling stake for NMDC.

Construction of the plant, which will be located in the state of Karnataka, is due to begin in 2012. NMDC Finance Director Swaminathan Thiagarajan told Bloomberg that the facility would cost $5 billion and have the initial capacity of 2 m tonnes a year.

“The 2 m tonne output is quite modest, accounting for about 3-4% of the local market. But this will be enough for Severstal to assess the plant’s financial efficiency and the market potential. Besides, an equal 50% stake in a joint venture with NMDC, an Indian state mining company, will secure ore supplies and fixed prices for further project expansion to five million tonnes”, says Dmitry Kumanovsky, director of research with the Lenmontazhstroy investment company. “The expected plant capacity of 2 m tonnes accounts for only 15% of Severstal’s total output in 2009", says Andrei Tretelnikov, an analyst with Rye, Man & Gor Securities.

Alexei Mordashov (excerpt from interview to Vesti 24):
The European economy is growing very slowly and a number of Euro states are in dire financial straits that affect their growth. The region has an established production and consumption market for rolled steel and limited opportunities for vertical integration: Europe does not have its own iron ore resources. All these factors show that there is not much potential to develop our business in Europe. We plan to exit Europe and focus on geographic diversification of our presence in those regions that offer maximum growth options. We view India as a very promising market. Surely, we would like to launch several projects in India. We are also looking at South-East Asia: Indonesia, the Philippines, and Vietnam with great interest. They demonstrate rapid growth and we see their enormous potential for our steel making business. China is less appealing to Severstal, because it has its own well-developed steel industry and imposes tight constraints on foreign presence in that sector. We think that for us China offers only limited opportunities. We are more interested in entering such markets as India, Indonesia and South-East Asia in general.

The joint venture between Severstal and NMDC will also set up two subsidiaries to mine coking coal in Russia and iron ore in India.

The Indian project marks Severstal’s U-turn from West to East. Previously, the Russian steel giant preferred picking assets in Europe and the United States. The economic downturn hit its American assets harder than those in other regions: in 2009 they set Severstal back by $1 billion in losses. In October of 2010, Severstal announced its plans to sell the North American capacity. Earlier, in August, its subsidiary Severstal North America solicited acquisition offers for its plants Severstal Warren, Severstal Sparrows Point and Severstal Wheeling.

In a recent interview with a Russian national TV channel, Severstal’s owner Alexei Mordashov said Europe was no longer attractive for steel makers. “Economic growth is sluggish and a number of EU countries are in serious financial trouble, which also shackles growth. All of this indicates that for us European potential is rather limited”, said Mr Mordashov.

According to Severstal’s major shareholder, the most attractive markets today are India, Indonesia, the Philippines, Vietnam and Africa. The Russian tycoon notably singles out India as the best option. This makes sense given that India has a fast growing steel market. Based on projections from the Indian Ministry of Steel, the consumption rate will be up by 10% in 2010 from 65 m to 73 m tonnes. Yet more steel – up to 200 m tonnes by 2020 - will be needed to fuel advancing industrialisation and economic growth. At the same time, India's economy, according to Lakshmi Mittal, who owns ArcelorMittal, a giant steel maker, will encounter supply shortages starting from 2015 due to production constraints with the supply-demand gap widening to up to two thirds of the national steel output. In these circumstances, international steel companies will be in a position both to expand production and capture a premium on world steel prices by selling on the Indian market.

The partnership with NMDC may provide a number of safeguards for Severstal: the Indian corporation could, for instance, take upon itself resolution of local legal issues associated with land ownership. Land proved to be the stumbling block that delayed many steel projects in India, including those run by ArcelorMittal and Posco. According to preliminary estimates, the new facility envisaged by Severstal and NMDC will cover 2,500 acres (10.12 square kilometres). "NMDC is a big iron ore producer and obviously the right partner for building new steel capacity in India”, says Yury Volov, an analyst with the Bank of Moscow.

Apart from direct investment, Severstal will bring in advanced steel-making technology, which is not available on the local market, believe the experts. The mill will turn out special automotive and electrical grades of steel, high added-value products, for the fast-growing automotive and power sectors of the Indian economy. NMDC in its turn will benefit from its cooperation with Severstal as the Russian company has a significant coal-mining operation, which provides coking coal for making rolled steel.

Severstal is spearheading Russian entry into the Indian market, while other Russian steel companies that have been eyeing India for some time will closely watch the competitor’s progress. If the project works out, other Russian players may step into the Indian scene. “The main challenge in the Indian market will be the access to cheap iron ore, which is more expensive than in Russia. If this risk can be mitigated in the way Severstal managed , other Russian steel makers will also use fast-track opportunities in emerging markets”, believes Kumanovsky.